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Tuesday, September 22, 2009

All That Glitters

What about investing in gold? The glittering metal has been receiving a lot of press lately, as the price per ounce has gone over $1,000. I have read some speculation that the price is headed to over $3,000 in the near future. The problem is that any price target for gold is just that, speculation. Gold doesn't have much real use, outside of jewelry. So the the return on investing in gold is solely based on the willingness of someone else to buy your gold from you at a higher price. That is not true for other types of investments over the longer-term.

Bonds pay interest, which you receive over the time you own the bond. The risk is that these interest payments won't keep pace with inflation, but as an investor, you know what those nominal interest payments will be before you invest.

Stocks represent ownership in companies, and as owners, we benefit as those companies grow and make profits. Stock prices certainly bounce around in the short-term and feel like speculative investments, but the longer-term return for stocks does a pretty good job of reflecting corporate profits.

Even commodities, like petroleum and agricultural products, have a different return story than gold. True commodities are "use assets", meaning that those that buy them do so because they need to use them. During periods of economic growth, global demand for commodities rises, thereby pushing up prices. We much prefer a diversified basket of commodities, not gold, as a hedge against inflation. Inflation refers to a general rise in prices across the economy, meaning that in inflationary periods, the prices of commodities should rise.

Here are two articles that do a good job of explaining why gold may not be a good long-term investment: